The UK is in danger of losing its pre-eminence as a world financial market leader because of the regime of heavy-handed regulation imposed by the industry watchdog, it was claimed today.

The Financial Services Authority has lost the respect and support of the industry, the report from the Centre for Policy Studies maintains.

Competitiveness is being undermined by burdensome compliance requirements, and innovation and entrepreneurialism are being thwarted, it states, laying the blame firmly at the door of the FSA, which has been dubbed the "fine slapping authority" in some quarters.

The claims are made in an open letter to FSA chief executive John Tiner, composed after the think-tank's research team conducted confidential interviews with leading city figures.

"The FSA, which came into formal existence in 2002, is one of the most powerful, and one of the least accountable, institutions created in the UK since the war," the report said.

"The industry fears that the FSA is an increasingly defensive and risk-averse organisation. This has contributed to a culture of prescriptive and increasingly complex regulation."

The FSA hit back at the report, saying it was riddled with factual inaccuracies and showed a lack of understanding as to the role of the

regulator. Mr Tiner said: "The fact remains that the UK financial services industry continues to flourish and has consolidated its position as the world leading international financial centre.

"But clearly this position must never be taken for granted. We are sensitive to industry concerns around

the burden of regulation and we have already set in train a number of initiatives to address them."

And Financial Secretary to the Treasury Stephen Timms said the FSA did an " extremely effective job".

Yesterday the FSA announced the scope, form and timing of a study into the costs of regulation.

It will pay particular attention to the impact of costs on small firms and on wholesale companies operating in internationally competitive markets.

Kari Hale, director of finance, strategy and risk at the FSA, said: "It is a priority for the FSA to develop a deeper understanding of the impact of the costs of regulation on firms, especially smaller firms, and ensure that these costs are justified by the benefits.

"If the study highlights areas of regulation that are expensive but offer little benefit to firms, consumers or the markets, we will look for ways of easing the burden on firms."